Despite Telkom, still a good product

2011-06-30 00:00

There are some things in South Africa you can pretty much stake your life on: Newlands rugby stadium being a sell-out, Julius Malema on the front page of a newspaper at least once a week and, of course, Telkom to throw a spanner in the works somewhere along the line. Last week we touched on the Satrix Divi exchange-traded fund (ETF) and confidently predicted it as the only real investment product the average retail investor needed. The product is low cost, accessible and if it’s nursed over an extended period of time, it can provide a very real stream of income for investors saving for retirement.

However, as two sharp-eyed Finweek readers pointed out, Telkom is the biggest component of the Satrix Divi portfolio and that in theory presents some interesting fundamental questions for investors. With no Vodacom cash cow and special dividend built in, serious challenges from other market players and an expensive spat with its partners in its Multi-Links project – plus a huge capital investment going into its 8.ta offering – there isn’t a lot to suggest Telkom can maintain its current dividend levels going forward.

The short answer is that Satrix Divi investors don’t really care about the underlying fundamentals at Telkom, or any of the other 29 components in the index. That’s part of the beauty of the product. Every six months the portfolio is reweighted. If the fundamentals have changed in a particular business and its future prospects for paying a dividend have changed then it will be reduced in the portfolio.

But let’s unpack it a bit further. There’s roughly R1bn sitting in the Satrix Divi portfolio. At end-March there was around R71m invested in Telkom. As it stands, Telkom is paying 4,2% dividend yield, so that means there’s about R2,98m in dividends currently being pushed into the Satrix portfolio. If Telkom halved its dividend yield and investors walked away with R1,49m in dividends divided by 13 000 Satrix Divi investors means the average investor loses out on R114 of Telkom dividends.

As the attached table shows, the Satrix Divi portfolio actually looks very different from traditional investment portfolios, which are either weighted according to size (Satrix 40) or fundamentals (Satrix/Absa Capital Rafi portfolios). Will Coronation Fund Managers be able to keep up its super profits? Can Kumba maintain its pricing advantage once those legal wrangles have been resolved? Assore indicated in December 2010 that the outlook for its commodities remains mixed, so that will naturally put pressure on future dividends.

Does any of that matter to the investor? Not really, because if any of the companies stop returning cash to them then it will be replaced in the portfolio. Obviously, there will be some opportunity cost lost between when the fundamentals change and when the reweightings occur, but in general that’s likely to have a relatively small impact on long-term investment returns.